Efficient VAR discretization
Economics Letters, 2021, vol. 204, issue C
Tensor-grid discretization of VARs is inefficient. In particular, when there are just a few variables or the VAR components are correlated, this approach creates large inefficiencies because some discretized states will be visited with only vanishingly small probability. I show how to construct an efficient grid by either pruning these low-probability states or working directly with sparse grids. Efficient grids vastly improve accuracy for a given grid size, or, conversely, vastly reduce the number of states required to attain a given level of accuracy.
Keywords: VAR; Autoregressive; Discretization; Sparse grids (search for similar items in EconPapers)
JEL-codes: C32 C63 E32 E52 (search for similar items in EconPapers)
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Working Paper: Efficient VAR Discretization (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:204:y:2021:i:c:s016517652100149x
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